M/s. Jamadar Travels, Bharuch V. The ACIT, Central Circle-2, Baroda

ITSSA 329/AHD/2014

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 1824 (ITAT-SURAT)
• Duration Of Justice: 3 year(s) 6 month(s) 15 day(s)
• Appeal Type: Income Tax (Search & Seizure) Appeal
• Pronouncement Date: 05-03-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 13-06-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 21-08-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R KAVITHA
• Assessee Lawyers: B T THAKKAR
• Keywords: Notional interest
• Section: 40(b)

Judgement Text

M/S. JAMADAR TRAVELS V. ACIT-CC-2 /I.T.SSA. NO. 329 /AHD/2014& I.T.A. NO. 2366/AHD/2016/A.Y. 06-07&07-08 PAGE 1 OF 5 INCOM TAX APPELLATE TRIBUNAL SURAT-BENCH-SURAT BEFORE SHRI C .M. GARG, JUDICIAL MEMBER AND SHRI O. P. MEENA, ACCOUNTANT MEMBER I.T.SSA. NO. 329/AHD/2014 & I.T.A. NO. 2366/AHD/2016 ASSESSMENT YEAR: 2006-07 & 2007-08 M/S. JAMADAR TRAVELS DADIA BAZAR BHARUCH PAN:AABFJ 9426G V S . ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE -2 BARODA APPELLANT RESPONDENT ASSESSEE BY SHRI B. T. THAKKAR, FCA, A.R. REVENUE BY MS. R. KAVITHA JCIT, SR. D.R. DATE OF HEARING 05.03.2018 DATE OF PRONOUNCEMENT 1 3 .03.2018 ORDER PER O. P. MEENA, AM 1. THESE TWO APPEALS BY THE ASSESSEE ARE DIRECTED AGAINST THE COMMON ORDER OF LEARNED OF COMMISSIONER OF INCOME TAX (APPEALS)-IV, AHMEDABAD (IN SHORT THE CIT (A)) DATED 09.06.2014 PERTAINING TO ASSESSMENT YEAR 2006-07 AND 2007-08, WHICH IN TURN HAS ARISEN FROM THE ORDER DATED 23.12.2008 PASSED BY THE ASSISTANT COMMISSIONER OF INCOME TAX CENTRAL CIRCLE-2 BARODA (IN SHORT THE AO ) UNDER SECTION 143 (3) OF INCOME TAX ACT,1961 ( IN SHORT THE ACT). M/S. JAMADAR TRAVELS V. ACIT-CC-2 /I.T.SSA. NO. 329 /AHD/2014& I.T.A. NO. 2366/AHD/2016/A.Y. 06-07&07-08 PAGE 2 OF 5 2. SINCE THE GROUNDS OF APPEAL ARE COMMON FOR BOTH ASSESSMENT YEARS UNDER CONSIDERATION, HENCE, THESE WERE HEARD TOGETHER AND BEING DISPOSED-OFF BY COMMON ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. 3. GROUND NO.(I) TO (III) IN BOTH APPEALS IS AGAINST THE CONFIRMATION OF ADDITION OF RS. OF RS. 3,54,073 (A.Y. 06-07) AND RS. 5,22,011 (A.Y. 07-08) MADE BY THE AO ON ACCOUNT OF DISALLOWANCE OF INTEREST FOR ALLEGED DIVERSION OF INTEREST BEARING FUNDS FOR NON- BUSINESS PURPOSES. 4. FACTS IN BRIEF ARE THAT THE ASSESSEE HAS UTILIZED ITS OWN BUILDING FUNDS OF RS. 29, 50,609 FOR CONSTRUCTION OF RESIDENTIAL BUILDING OF ITS PARTNERS. ON THE OTHER HAND, THE ASSESSEE-FIRM HAD PAID INTEREST OF RS. 1, 33,954 AND RS. 2, 46,347 IN RESPECT OF HIGHER CHARGES AND INTEREST OF RS. 4, 42,997 ON CAPITAL TO PARTNERS. THEREFORE, THE AO WAS OF THE VIEW THAT THE ASSESSEE HAS DIVERTED ITS INTEREST BEARING FUNDS TO NON-BUSINESS PURPOSES. ACCORDINGLY THE AO MADE DISALLOWANCE OF NOTIONAL INTEREST @ 12% ON THE AMOUNT OF RS. 26,50,609 WHICH WORKED OUT TO RS. 3,54,073 FOR A.Y. M/S. JAMADAR TRAVELS V. ACIT-CC-2 /I.T.SSA. NO. 329 /AHD/2014& I.T.A. NO. 2366/AHD/2016/A.Y. 06-07&07-08 PAGE 3 OF 5 06-07 AND @ 12% AT RS. 5,22,011 ON THE AMOUNT OF RS. 43,33,429 FOR THE ASSESSMENT YEAR 2007-08. THE CIT (A) HAS ALSO CONFIRMED THE SAID DISALLOWANCE OF INTEREST. 5. BEING, AGGRIEVED THE ASSESSEE FILED THIS APPEAL BEFORE THE TRIBUNAL. THE LD. AR FOR THE ASSESSEE SUBMITTED THAT THE INTEREST PAYMENT OF RS. 1, 33,954 AND RS. 2, 46,347 IS IN RESPECT OF HIGHER CHARGES, WHICH HAS DIRECT NEXUS BETWEEN BORROWINGS OF SECURED LOAN AGAINST ACQUISITION OF BUSES FOR THE BUSINESS PURPOSE. IN THIS RESPECT, THERE IS NO DISPUTE OF REVENUE. HOWEVER, THE AO AND LD. CIT (A) CONSIDERED THAT INTEREST PAYMENTS TO PARTNERS ON THEIR CREDIT BALANCE WOULD FORM PART OF BORROWING COST. THE LD. AR CONTENDS THAT INTEREST PAYMENTS TO PARTNERS ON THEIR CREDIT BALANCE IS NOT BORROWING COST AS FIRM AND ITS PARTNERS ARE SAME. THEREFORE, IT CANNOT BORROW FROM ITS PARTNERS. IT IS A CAPITAL CONTRIBUTION. FURTHER, AS PER NEW PROVISION OF SECTION 40(B) INTRODUCED WITH EFFECT FROM A.Y. 1993-94, ALLOWS INTEREST ON PARTNERS CAPITAL AND REMUNERATION ON WORKING PARTNERS TO BE TAXED AS INCOME FROM BUSINESS AND PROFESSION. THEREFORE, INTEREST M/S. JAMADAR TRAVELS V. ACIT-CC-2 /I.T.SSA. NO. 329 /AHD/2014& I.T.A. NO. 2366/AHD/2016/A.Y. 06-07&07-08 PAGE 4 OF 5 PAYMENT TO PARTNERS CANNOT BE CONSIDERED AS INTEREST PAYMENT ON BORROWED FUNDS. THE CIT (A) HAS ALLOWED THE APPEAL OF THE ASSESSEE FOR A.Y. 2005-06 ON THE GROUND THAT THE FIRM HAD NOT PAID INTEREST TO ITS PARTNERS IN THAT ASSESSMENT YEAR. ALTERNATIVELY, THE ASSESSEE HAS INTEREST-FREE FUNDS AVAILABLE AT RS. 103.97 LAKHS AFTER DEDUCTION OF SUNDRY DEBTORS OF RS. 60.56 LAKHS AND NET INTEREST- FREE FUNDS AVAILABLE AT RS. 43.41 LAKHS AS ON 31.03.2006 AND NET INTEREST-FREE FUNDS OF RS. 57.53 LAKHS [130.83-73.30= 57.53] ARE AVAILABLE AS ON 31.03.2007 WHICH IS MUCH HIGHER THAN DIVERTED FUNDS(COPY OF BALANCE SHEET FILED AS ON 31.03.06 AND 31.03.07).THEREFORE, IT WAS URGED UPON US TO DELETE THE IMPUGNED DISALLOWANCE OF INTEREST. 6. PER CONTRA, THE LD. SR. DR SUPPORTED THE ORDER OF THE LOWER AUTHORITIES, BUT COULD NOT CONTROVERT THE FACT THAT SUFFICIENT INTEREST-FREE FUNDS WERE AVAILABLE WITH THE FIRM, WHICH ARE MORE THAN THE INVESTMENT MADE IN RESIDENTIAL BUILDING. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. AFTER CAREFUL CONSIDERATION OF THE FACTS, WE M/S. JAMADAR TRAVELS V. ACIT-CC-2 /I.T.SSA. NO. 329 /AHD/2014& I.T.A. NO. 2366/AHD/2016/A.Y. 06-07&07-08 PAGE 5 OF 5 ARE OF THE VIEW THAT THE ASSESSEE-FIRM HAD INTEREST-FREE FUNDS OF RS. 43.41 LAKH FOR A.Y. 06-07 AND RS. 57.53 LAKH FOR A.Y. 07-08 AS AGAINST THE FUND INVESTED IN RESIDENTIAL BUILDING, HENCE, IT CANNOT BE SAID THE INTEREST BEARING FUNDS HAVE BEEN UTILIZED FOR NON- BUSINESS PURPOSES. THEREFORE, NOTIONAL DISALLOWANCE OF INTEREST ON CREDIT BALANCE OF PARTNER`S CAPITAL IS UNCALLED FOR BOTH THE ASSESSMENT YEARS, HENCE, SAME IS THEREFORE, DIRECTED TO BE DELETED. THUS, THE BOTH GROUNDS OF APPEAL FOR BOTH ASSESSMENT YEARS ARE ALLOWED. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE STANDS ALLOWED FOR BOTH ASSESSMENT YEARS. 9. ORDER PRONOUNCED IN THE OPEN COURT ON 13.03.2018 SD/- SD/- (C.M. GARG) (O.P.MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER SURAT: DATED: 13 TH MARCH, 2018/OPM COPY OF ORDER SENT TO- ASSESSEE/AO/PR. CIT/ CIT (A)/ ITAT (DR)/GUARD FILE OF ITAT. BY ORDER ASSISTANT REGISTRAR, SURAT